OECD/EU: Lawsuits over tax breaks end are ‘your problem’

The Bahamas would have been “blacklisted” had it insisted on existing foreign investors fully enjoying their preferential investment incentives, the deputy prime minister revealed yesterday.

KP Turnquest, leading off House of Assembly debate on anti-tax evasion legislation, said both the European Union (EU) and Organisation for Economic Co-Operation and Development (OECD) were unsympathetic towards The Bahamas’ concerns that early elimination of these tax breaks could expose the Government to multiple lawsuits for breach of constitutional rights.

While The Bahamas had sought to “push back substantially and aggressively” over their demands for these incentives to cease immediately, he added that the Government ultimately had to settle for year-end 2021 as the date for when they will expire.

This means that many foreign owners of existing Bahamian-domiciled International Business Companies (IBCs) and other corporate vehicles will no longer receive the expected 20-year stamp duty exemption and other incentives, such as the flat $300 business licence fee, as a result of this nation complying with demands to end so-called “ring fencing” practices.

The 28-nation EU, in particular, is pushing for an end to “ring fencing”, or preferential tax regimes for non-resident entities and foreign investors that are not offered to their Bahamian counterparts, because it believes they are open to abuse by corporate tax evaders.

The Bahamas’ response is the Removal of Preferential Exemptions Bill 2018, which only permits existing IBCs, Investment Condominiums (ICONs) and Exempted Limited Partnerships (ELPs) to maintain their special investment incentives for a further three years - leading Mr Turnquest to say he was under no illusions as to “what that might mean”.

Responding to questions from Opposition leader Philip Davis, who expressed concern over how the EU and OECD will react should any constitutional-based challenge to the “ring fencing” incentives elimination be successful, Mr Turnquest said both responded that The Bahamas is on its own.

Acknowledging the potential for multiple lawsuits, he added that the Government, legal profession and financial services industry, and their clients would have to negotiate the best way forward for all parties and The Bahamas on the investment incentives issue.

“This is an area where, in the last meeting with the OECD and its Global Tax Forum the week before last, we pushed back substantially and aggressively,” Mr Turnquest told the House of Assembly.

“We explained that in the IBCs Act are provisions for, in some cases, these exemptions to extend out for 40 years. The EU and OECD, while in Uruguay, stated emphatically that these terms would be unacceptable and lead to blacklisting.

“They proposed six months for phasing out these exemptions,” the Deputy Prime Minister continued. “We told them that would be impossible, as some companies would not be notified in three to six months, let along make the necessary changes in six months.

“We pushed for five years. They again rejected our five-year proposal and offered three years, which is consistent with the OECD’s [transition period] requirements. In this particular context I understand, and do not want to under-state for one minute what that might mean.”

This was brought into sharp focus by Mr Davis, who asked: “With the exemptions, and breaking down the issue, the question I am asking under our constitutional regime is what would happen if an IBC enjoying a 40-year exemption challenges it, and it is found by our courts to be unconstitutional? Where does that leave us. and how will the OECD treat that? That is of concern.”

Mr Turnquest, in response, said the Bahamas had put such fears to both the EU and OECD. “Unfortunately, they say that’s your issue, not our issue,” he added, explaining that all sides will now have to wait and see how the situation plays out once the year-end 2021 elimination deadline nears.

“That’s the position they’ve taken,” the Deputy Prime Minister reiterated of the two bodies. “We don’t write your constitution; you do. That’s your problem, not our problem. That’s between you and your people. Do what you have to do.

“I’m going to leave that to you legal scholars. As a government we will not be the first to have these challenges. Other jurisdictions have similar challenges. It’s going to be a matter of how we negotiate, argue and discuss between our stakeholders, and what’s in the best interest of the jurisdiction going forward.”

Tribune Business revealed last week that the early elimination of these tax breaks for foreign investors/non-resident entities would likely spark multiple legal challenges that, if successful, could cost the taxpayer substantially if the courts order compensation payments.

John Delaney, the former Attorney General, told this newspaper that such investors had a “legitimate expectation” they would enjoy these preferential incentives, which are not available to Bahamians in the domestic economy, for their full duration.

All IBCs incorporated from 2002 onwards will not enjoy the 20-year stamp duty waiver their beneficial owners will have anticipated, and Mr Delaney went so far as to suggest existing Bahamian law may have given investors a “vested right” to such benefits, highlighting the potential legal peril that awaits the Government as a result.

Mr Turnquest, meanwhile, said the Removal of Preferential Exemptions Bill 2018 would ensure no Bahamian-domiciled corporate entity “has a tax advantage over another”.

“We are granting domestic companies some of the advantages granted to IBCs,” he added. “The net effect will be to equalise the two companies so each can do what the other can and be exposed to the same tax obligations.”

Explaining why the Government had chosen to comply with the EU/OECD demands, Mr Turnquest said the threat - or reality - of being included on another financial services-related “blacklist” represented “untenable risks for a young country with high debt, high unemployment, limited human and physical capacity”.

He added that the resulting reputational damage from any “blacklisting” could drive away potential and existing investors, harming The Bahamas’ economic growth prospects and stability, while undermining a financial services industry and its high-paying jobs that have underpinned development of a Bahamian middle class.

Mr Turnquest also hit back at arguments that The Bahamas was being “dictated to” by the EU/OECD, with its laws being formed and driven by outside powers as it continues to give up its sovereignty.

Effectively arguing that resistance was futile, the Deputy Prime Minister argued that The Bahamas had “no powerful friends to hide behind” when it came to the global drive for greater tax transparency and an end to so-called “harmful tax practices”.

With all G-20 members, including the US, having signed on to these initiatives, Mr Turnquest said: “It’s unreasonable to expect any one of these countries, be they friend or foe, are going to stand up and say: ‘I want to eliminate harmful tax practices, but I want an exemption for our friends in The Bahamas’.”

He added that the G-20, together with the OECD and EU, wanted to effectively create a global “level playing field” on tax competition because of perceptions that capital is fleeing to low or ‘no’ tax jurisdictions thereby depriving them of much-needed tax revenue.